Venture capital and private equity are gravitating towards defense technology companies, reversing decades of investor hesitance.
Historically, many investors have been wary of the defense sector, given its high barriers to entry, low unit volumes, and atypical go-to-market costs.
However, the sentiment is shifting as investors have become more knowledgeable about the sector, resulting in dollars being deployed more efficiently as they bet on disruptive new technologies.
Funding to VC-backed start-ups in defense hit $3 billion in 2024 with 102 deals — an 11% increase from $2.7 billion in 2023, according to data from Crunchbase.
The growth of defense tech shows no signs of slowing down. There’s an expectation from industry participants of an increase in defense spending under a new White House administration, which will likely drive more interest in the space.
The value of venture capital deals in the defense sector has increased over the past 10 years. Venture capital investments reached record volumes and value in 2021, significantly ahead of deal value in other industries such as energy, IT, healthcare, and financial services, according to Pitchbook.
The Department of Defense’s efforts to partner with and fund early-stage companies and the growing intersection of commercial and defense technologies contribute to this consistent growth.
There are several tailwinds that are driving more investors to the sector than there were previously.
What are the Four Trends Driving Interest in Defense Technology?
Trend #1
The increasing role of technology and artificial intelligence has shifted how institutional investors and private equity firms think about investments in defense.
AI has significant potential to revolutionize military operations by enabling autonomous systems, predictive analytics, decision support tools, and advanced data processing capabilities. AI applications range from unmanned aerial vehicles and autonomous ground vehicles to intelligence analysis and real-time decision-making dashboards and logistics optimization.
Trend #2
Geopolitical instability worldwide has motivated the Pentagon to seek increases in funding for force readiness and troop training to maintain the immediate projection capability of the military. Ongoing investment in technological innovation is necessary to ensure military readiness in the face of emerging threats and security challenges.
Trend #3
A notable trend emerging in the defense technology landscape is characterized by the transition of former Pentagon officials and military officers into venture capital roles. Traditionally, these officials have moved into positions within established defense contractors.
This shift is seen as a way to leverage their extensive networks and expertise to potentially streamline the acquisition process for the Pentagon.
Examples include Mark Esper, former Secretary of Defense, who is now with Red Cell Partners, a firm investing in military software; and Dan “Razin” Caine, a retired Air Force Lt. General who has been confirmed as the Chairman of the Joint Chiefs of Staff. He was with Shield Capital investing in national security technologies.
Trend #4
The DOD’s continued emphasis on technology is apparent with the creation of several initiatives, including its first Defense Industrial Strategy, announced in January 2024, which calls for the diversification of the defense industrial ecosystem over the next three to five years. The strategy calls for several actions to achieve resilient supply chains through public-private partnerships, risk-sharing mechanisms, and technology. These efforts to support start-ups will fuel interest in the defense sector.
How is Recent Venture Capital Activity Creating Momentum in Defense Tech?
Disruptive venture-backed companies with compelling technologies and competitive cost levels are positioned to take market share. Investor enthusiasm is evident in a series of large funding rounds, rising valuations, and acquisitions in the defense tech space. Deals from earlier this year will create momentum for the second half of 2025 and into early 2026.
In January, defense tech startup Castelion raised $100 million through debt and equity to build hypersonic missile systems. Castelion hopes to sell long-range strike weapons to the U.S. military, and many industry participants are hopeful the new administration will yield more government contracts for startups.
The DOD has considered hypersonics a national security imperative for more than a decade. President Trump, who has discussed missile defense in his second term, issued an executive order aimed at bolstering the country’s air defenses against advanced weapons, including hypersonic missiles.
At the beginning of February, Hidden Level, a developer of passive radar and radio frequency sensing technology, raised $65 million in Series C funding. The new capital will be used to scale the business by expanding manufacturing and growing internationally after deployments with customers that include NASA, the U.S. Army, the U.S. Air Force, and the U.S. Department of Defense.
In March, Epirus, a defense technology startup that makes directed energy and anti-drone systems, closed on a $250 million Series D fundraising round. The startup said the fundraising would help scale the production of its Leonidas product line, which has been proven effective by the DOD’s testing in countering drones, drone swarms, and other electronics.
Investors continue to back Silicon Valley’s burgeoning defense industry. Groups like Palantir, SpaceX, Anduril, and OpenAI have, in some cases, integrated systems to leverage their technology in order to advance America’s military capabilities.
Industry leaders recognize the growing demand for autonomy at scale. Shield AI, a tech company that builds autonomous software products and defense aircraft, is another recent example of how venture-backed companies are gaining interest from investors. In March, the company announced it completed a $240 million, F-1 strategic funding round, raising the company’s valuation to $5.3 billion.
Why is Private Equity Attracted to the Defense Tech Sector?
Private equity firms are also looking to harvest defense investments in 2025, capitalizing on a hot sector with tailwinds driven by heightened global tensions and taking advantage of the DOD’s push for more private capital to get involved in the sector. There’s also a lot of fragmentation and opportunities throughout the supply chain that private equity will target. Recent deals in the first quarter of 2025 support this observation.
Private equity giants are betting on this sector. Triumph Group announced in February it was sold to private equity firms Warburg Pincus and Berkshire Partners in a deal valued at $3 billion. The company, which designs, develops, and manufactures a wide range of aerospace and defense systems and components, will transition from a publicly traded entity to private ownership.
In March, Washington, D.C.-based private investment firm Arlington Capital Partners announced the formation of GRVTY, a defense technology solutions company focused on geospatial intelligence, signals intelligence, and cyber security. Arlington said GRVTY would “deliver innovation at speed and scale to support our national security customers.”
This announcement comes on the heels of Arlington’s November 2024 announcement to sell BlueHalo, which provides capabilities in space technologies, counter-uncrewed aircraft systems, and electronic warfare, to AeroVironment for $4.1 billion, creating a global leader in diversified all-domain defense technologies.
What Does the Future Defense Tech Landscape Look Like?
With the turbulent geopolitical landscape unlikely to let up any time soon, the continued focus on defense technology investments is warranted. The confluence of these trends — enthusiastic investors, marquee funding deals, government-backed initiatives, and pressing global threats — has created a favorable environment for venture-backed and private equity investment in defense technologies.
While challenges remain, such as navigating military procurement bureaucracy and generating a consistent return for investors, the overall trajectory of this sector points upwards. If the current momentum of deal activity holds, we can expect more funding rounds, more groundbreaking technology on the battlefield, and the continued blurring of the line between established defense companies and venture-backed innovation ecosystems.
William (Bill) Farmer is a managing director at Brown Gibbons Lang & Company and leads the firm’s investment banking activities within the aerospace, defense and government services sector.
https://www.washingtontechnology.com/opinion/2025/04/defense-tech-ecosystem-gives-investors-many-opportunities/404521/
